-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J59lFg1rjpJFXXWmNYM4iNgSMh2HzHp4aTLlDbRjpCRVJ1dBdvg556+oZboIPXBI PUx/4oXP/YZ+wG2njp6LCg== 0000770944-99-000014.txt : 19991117 0000770944-99-000014.hdr.sgml : 19991117 ACCESSION NUMBER: 0000770944-99-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALLY TOTAL FITNESS HOLDING CORP CENTRAL INDEX KEY: 0000770944 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS [7997] IRS NUMBER: 363228107 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13997 FILM NUMBER: 99754810 BUSINESS ADDRESS: STREET 1: 8700 WEST BRYN MAWR AVENUE CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 7733803000 FORMER COMPANY: FORMER CONFORMED NAME: BALLYS HEALTH & TENNIS CORP DATE OF NAME CHANGE: 19940526 10-Q 1 09/30/1999 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the period ended September 30, 1999 or [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number: 0-27478 BALLY TOTAL FITNESS HOLDING CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-3228107 (State or other jurisdiction of (I.R.S. Employer incorporation) Identification No.) 8700 West Bryn Mawr Avenue, Chicago, Illinois 60631 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (773) 380-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: As of October 31, 1999, 23,819,079 shares of the registrant's common stock were outstanding. BALLY TOTAL FITNESS HOLDING CORPORATION INDEX PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial statements: Condensed consolidated balance sheets (unaudited) September 30, 1999 and December 31, 1998...................... 1 Consolidated statements of operations (unaudited) Three months ended September 30, 1999 and 1998................ 2 Consolidated statements of operations (unaudited) Nine months ended September 30, 1999 and 1998................. 3 Consolidated statement of stockholders' equity (unaudited) Nine months ended September 30, 1999.......................... 4 Consolidated statements of cash flows (unaudited) Nine months ended September 30, 1999 and 1998................. 5 Notes to condensed consolidated financial statements (unaudited)................................................... 7 Item 2. Management's discussion and analysis of financial condition and results of operations.................... 10 PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K.......................... 14 SIGNATURE PAGE....................................................... 15 BALLY TOTAL FITNESS HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
SEPTEMBER 30 DECEMBER 31 1999 1998 ------------ ----------- ASSETS Current assets: Cash and equivalents........................... $ 12,517 $ 64,382 Installment contracts receivable, net.......... 225,308 199,979 Other current assets........................... 42,695 34,212 ---------- ---------- Total current assets......................... 280,520 298,573 Installment contracts receivable, net............ 255,030 222,147 Property and equipment, less accumulated depreciation and amortization of $371,654 and $340,702................................... 447,040 361,300 Intangible assets, less accumulated amortization of $62,649 and $58,844............ 133,456 101,815 Deferred income taxes............................ 29,570 17,430 Deferred membership origination costs............ 105,335 97,901 Other assets..................................... 35,669 29,679 ---------- ---------- $1,286,620 $1,128,845 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................... $ 42,902 $ 40,957 Income taxes payable........................... 3,211 2,608 Deferred income taxes.......................... 31,059 18,919 Accrued liabilities............................ 65,449 48,596 Current maturities of long-term debt........... 9,316 5,799 Deferred revenues.............................. 296,794 282,806 ---------- ---------- Total current liabilities.................... 448,731 399,685 Long-term debt, less current maturities.......... 548,676 482,199 Other liabilities................................ 6,075 6,226 Deferred revenues................................ 84,059 78,952 Stockholders' equity............................. 199,079 161,783 ---------- ---------- $1,286,620 $1,128,845 ========== ========== See accompanying notes
1 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30 ------------------------ 1999 1998 ---------- ---------- Net revenues: Membership revenues -- Initial membership fees on financed memberships originated......................... $ 119,968 $ 107,053 Initial membership fees on paid-in-full memberships originated......................... 5,566 7,086 Dues collected................................... 58,922 52,016 Change in deferred revenues...................... (303) (183) ---------- ---------- 184,153 165,972 Finance charges earned.............................. 15,086 13,573 Products and services............................... 20,290 10,728 ---------- ---------- 219,529 190,273 Operating costs and expenses: Fitness center operations........................... 117,705 108,809 Member processing and collection centers............ 9,962 10,357 Advertising......................................... 12,217 10,897 General and administrative.......................... 6,975 6,775 Provision for doubtful receivables.................. 35,719 30,857 Depreciation and amortization....................... 13,232 11,997 Change in deferred membership origination costs..... (1,421) (3,229) ---------- ---------- 194,389 176,463 ---------- ---------- Operating income...................................... 25,140 13,810 Interest income....................................... 415 942 Interest expense...................................... (13,062) (10,216) ---------- ---------- Income before income taxes............................ 12,493 4,536 Income tax provision ................................. (250) (275) ---------- ---------- Net income ........................................... $ 12,243 $ 4,261 ========== ========== Net income per common share--basic.................. $ .52 $ .18 ========== ========== Net income per common share--assuming dilution...... $ .45 $ .16 ========== ========== See accompanying notes
2 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------ 1999 1998 ---------- ---------- Net revenues: Membership revenues -- Initial membership fees on financed memberships originated......................... $ 365,589 $ 321,663 Initial membership fees on paid-in-full memberships originated......................... 17,671 24,387 Dues collected................................... 174,244 150,218 Change in deferred revenues...................... (14,579) (6,497) ---------- ---------- 542,925 489,771 Finance charges earned.............................. 44,546 36,904 Products and services............................... 50,587 29,528 ---------- ---------- 638,058 556,203 Operating costs and expenses: Fitness center operations........................... 346,387 316,397 Member processing and collection centers............ 30,310 30,615 Advertising......................................... 38,096 35,986 General and administrative.......................... 19,866 19,399 Provision for doubtful receivables.................. 107,410 92,555 Depreciation and amortization....................... 38,276 36,492 Change in deferred membership origination costs..... (6,872) (12,613) ---------- ---------- 573,473 518,831 ---------- ---------- Operating income...................................... 64,585 37,372 Interest income....................................... 1,829 2,213 Interest expense...................................... (37,805) (30,723) ---------- ---------- Income before income taxes and cumulative effect of a change in accounting principle.......... 28,609 8,862 Income tax provision ................................. (580) (525) ---------- ---------- Income before cumulative effect of a change in accounting principle................................ 28,029 8,337 Cumulative effect of a change in accounting principle, net of income tax................................... (262) ---------- ---------- Net income ........................................... $ 27,767 $ 8,337 ========== ========== Earnings per common share --basic: Income before cumulative effect of a change in accounting principle........................... $ 1.20 $ .38 Cumulative effect of a change in accounting principle......................................... (.01) ---------- ---------- Net income per common share--basic.................. $ 1.19 $ .38 ========== ========== Earnings per common share - assuming dilution: Income before cumulative effect of a change in accounting principle.............................. $ 1.03 $ .32 Cumulative effect of a change in accounting principle......................................... (.01) ---------- ---------- Net income per common share--assuming dilution...... $ 1.02 $ .32 ========== ========== See accompanying notes
3 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share data) (Unaudited)
COMMON STOCK UNEARNED ------------------- COMPENSATION COMMON TOTAL NUMBER PAR CONTRIBUTED ACCUMULATED (RESTRICTED STOCK IN STOCKHOLDERS' OF SHARES VALUE CAPITAL DEFICIT STOCK) TREASURY EQUITY ---------- ----- ----------- ----------- ----------- -------- ------------- Balance at December 31, 1998....... 23,373,393 $ 239 $ 488,046 $ (309,306) $ (7,978) $(9,218) $ 161,783 Net income......................... 27,767 27,767 Issuance of common stock for acquisition of business.......... 141,723 1 7,798 7,799 Issuance of common stock under stock purchase and option plans.. 284,419 3 1,727 1,730 ---------- ----- ----------- ----------- ---------- ------- ------------ Balance at September 30, 1999...... 23,799,535 $ 243 $ 497,571 $ (281,539) $ (7,978) $(9,218) $ 199,079 ========== ===== =========== =========== ========== ======= ============ See accompanying notes
4 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------ 1999 1998 ---------- ---------- OPERATING: Income before cumulative effect of a change in accounting principle........................... $ 28,029 $ 8,337 Adjustments to reconcile-- Depreciation and amortization, including amortization classified as interest expense..... 40,714 38,162 Provision for doubtful receivables................ 107,410 92,555 Change in operating assets and liabilities..................................... (148,920) (165,302) ---------- ---------- Cash provided by (used in) operating activities. 27,233 (26,248) INVESTING: Purchases and construction of property and equipment..................................... (82,736) (47,690) Acquisitions of businesses and other................ (16,783) (2,117) ---------- ---------- Cash used in investing activities .............. (99,519) (49,807) FINANCING: Debt transactions -- Net borrowings under revolving credit agreement... 28,500 Redemption of 13% Senior Subordinated notes due 2003.................................. (24,021) Repayments of other long-term debt................ (5,584) (5,344) Debt issuance and refinancing costs............... (4,225) (317) ---------- ---------- Cash provided by (used in) debt transactions.... 18,691 (29,682) Equity transactions -- Proceeds from issuance of common stock through public offering................................. 82,744 Proceeds from issuance of common stock under stock purchase and option plans................. 1,730 423 Purchase of common stock for treasury (8,183) ---------- ---------- Cash provided by financing activities............ 20,421 45,302 ---------- ---------- Decrease in cash and equivalents...................... (51,865) (30,753) Cash and equivalents, beginning of period............. 64,382 61,679 ---------- ---------- Cash and equivalents, end of period................... $ 12,517 $ 30,926 ========== ========== (continued)
5 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) (In thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------ 1999 1998 ---------- ---------- SUPPLEMENTAL CASH FLOWS INFORMATION: Changes in operating assets and liabilities were as follows -- Increase in installment contracts receivable.................................... $ (165,622) $ (164,429) Increase in other current and other assets.................................. (5,852) (1,875) Increase in deferred membership origination costs............................. (6,872) (12,613) Increase in accounts payable.................... 1,869 2,746 Increase in income taxes payable................ 444 452 Increase in accrued and other liabilities................................... 12,534 3,920 Increase in deferred revenues................... 14,579 6,497 ---------- ---------- $ (148,920) $ (165,302) ========== ========== Cash payments for interest and income taxes were as follows -- Interest paid................................... $ 28,843 $ 25,787 Interest capitalized............................ (1,032) (422) Income taxes paid, net.......................... 136 73 Investing and financing activities exclude the following non-cash transactions -- Acquisition of property and equipment through capital leases/borrowings............. 22,113 7,104 Debt, including assumed debt, related to acquisitions of businesses.................... 24,835 - Acquisition of business with common stock....... 7,799 4,400 See accompanying notes.
6 BALLY TOTAL FITNESS HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands) (Unaudited) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Bally Total Fitness Holding Corporation (the "Company") and the subsidiaries which it controls. The Company, through its subsidiaries, is a commercial operator of fitness centers in North America, with approximately 360 facilities concentrated in 27 states and Canada. The Company operates in one industry segment, and all significant revenues arise from the commercial operation of fitness centers, primarily in major metropolitan markets. Unless otherwise specified in the text, references to the Company include the Company and its subsidiaries. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. All adjustments have been recorded which are, in the opinion of management, necessary for a fair presentation of the condensed consolidated balance sheet of the Company at September 30, 1999, its consolidated statements of operations for the three and nine months ended September 30, 1999 and 1998, its consolidated statements of cash flows for the nine months ended September 30, 1999 and 1998, and its consolidated statement of stockholders' equity for the nine months ended September 30, 1999. All such adjustments were of a normal recurring nature. The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which require the Company's management to make estimates and assumptions that affect the amounts reported therein. Actual results could vary from such estimates. In addition, certain reclassifications have been made to prior period financial statements to conform with the 1999 presentation. SEASONAL FACTORS The Company's operations are subject to seasonal factors and, therefore, the results of operations for the three and nine months ended September 30, 1999 and 1998 are not necessarily indicative of the results of operations for the full year. ACQUISITIONS During the first nine months of 1999, the Company acquired 23 fitness centers; 10 upscale centers in Toronto, Canada, six in Fresno, California, four in the Seattle area, two in the San Francisco area and one in Chicago. The total purchase price of the 23 centers was $43,340 consisting of debt, including assumed and seller financed debt, cash and shares of the Company's stock. Certain seller notes, which had a value of $8,947 on the date issued, are convertible into 275,312 shares of common stock on or before July 2001. SUBSEQUENT EVENT In November 1999, the Company completed a $175,000 senior secured credit facility consisting of a 5-year $75,000 term loan due November 2004 and the modification of the Company's existing revolving credit facility increasing the amount available to $100,000 and extending its maturity to November 2002. The amount available under the credit line is reduced by any outstanding letters of credit, which cannot exceed $30,000. 7 BALLY TOTAL FITNESS HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands) (Unaudited) INSTALLMENT CONTRACTS RECEIVABLE
SEPTEMBER 30 DECEMBER 31 1999 1998 ------------ ----------- Current: Installment contracts receivable $ 343,619 $ 294,880 Unearned finance charges...................... (42,453) (35,792) Allowance for doubtful receivables and cancellations........................... (75,858) (59,109) ----------- ----------- $ 225,308 $ 199,979 =========== =========== Long-term: Installment contracts receivable $ 337,081 $ 287,443 Unearned finance charges...................... (21,473) (18,104) Allowance for doubtful receivables and cancellations........................... (60,578) (47,192) ----------- ----------- $ 255,030 $ 222,147 =========== ===========
ALLOWANCE FOR DOUBTFUL RECEIVABLES AND CANCELLATIONS A summary of the allowance for doubtful receivables and cancellations activity is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Balance at beginning of period...... $132,297 $107,536 $106,301 $ 80,531 Contract cancellations and write-offs of uncollectable amounts, net of recoveries........ (70,123) (56,546) (197,640) (161,263) Provision for cancellations (classified as a direct reduction of revenues)........... 38,543 34,725 120,365 104,749 Provision for doubtful receivables....................... 35,719 30,857 107,410 92,555 -------- -------- -------- -------- Balance at end of period............ $136,436 $116,572 $136,436 $116,572 ======== ======== ======== ========
8 BALLY TOTAL FITNESS HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands) (Unaudited) EARNINGS PER COMMON SHARE Basic earnings per common share for each period is computed based on the weighted average number of shares of common stock outstanding of 23,417,395 and 23,491,719 for the three months ended September 30, 1999 and 1998, respectively, and 23,316,082 and 22,177,815 for the nine months ended September 30, 1999 and 1998, respectively. Diluted earnings per common share for each period includes the addition of common stock equivalents of 3,930,773 and 3,642,942 for the three months ended September 30, 1999 and 1998, respectively, and 3,779,647 and 3,790,714 for the nine months ended September 30, 1999 and 1998, respectively. Common stock equivalents represent the dilutive effect of the assumed exercise of outstanding warrants and stock options and conversion of convertible seller notes. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, Reporting the Costs of Start-up Activities. The SOP was effective beginning on January 1, 1999, and required that start-up costs including organization costs capitalized prior to January 1, 1999 be written-off and any future start-up costs be expensed as incurred. The Company's unamortized start-up costs at January 1, 1999 were written off and reported as a cumulative effect of a change in accounting principle, net of tax, in accordance with APB Opinion No. 20. 9 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Net revenue for the third quarter of 1999 was $219.5 million compared to $190.3 million in 1998, an increase of $29.2 million (15%). Net revenue from comparable fitness centers increased 9%. This significant increase in net revenue resulted from the following: -- Total new membership units sold increased 1% and the weighted average selling price of membership contracts sold increased 10% over the prior year quarter. These increases were attributable to the sale of higher margin multi-club, membership plans coupled with a significant strategic reduction in the scope of summer discount programs that, historically, resulted in slightly higher unit sales at significantly lower prices and yields. As a result, initial membership fees originated increased $11.4 million (10%) despite the loss of more than 1% of club sales days (over 300 club days) during the quarter due to inclement weather and other unusual conditions. -- Dues collected increased $6.9 million (13%) from the 1998 quarter, reflecting continued improvements in member retention and pricing from strategies implemented during prior periods and the increase in the number of fitness centers operating under our four upscale brands which generally charge higher dues. -- Finance charges earned during the third quarter of 1999 increased $1.5 million (11%) compared to the 1998 quarter, due to the growth in size and consistent higher quality of the receivables portfolio. Average interest rates for these finance charges were substantially unchanged between the periods. The percentage of accounts current with all contractual payments was 86% as of September 30, 1999 and 1998. -- Products and services revenue increased $9.6 million (89%) over the 1998 quarter, primarily reflecting increased sales of personal training services, nutritional and other retail products and financial services. The weighted average number of fitness centers increased to 348 from 323 in the third quarter of 1998, including an increase to a weighted average of 27 from 13 centers operating under four upscale brands: Bally Sports Club, Pinnacle Fitness, Gorilla Sports and Sports Clubs of Canada. Operating income for the third quarter of 1999 was $25.1 million compared to $13.8 million in 1998. The increase of $11.3 million (82%) was due to a $29.2 million (15%) increase in revenues offset by a $17.9 million (10%) increase in operating costs and expenses. The operating margin before depreciation and amortization increased to 17% from 14% in the prior year period. Excluding the provision for doubtful receivables and the effect of deferral accounting, operating costs and expenses increased $11.3 million (8%) from 1998. Fitness center operating expenses increased $8.9 million (8%) due principally to incremental costs of operating new fitness centers, costs supporting the revenue growth of new product and service offerings and additional commissions from the growth in initial membership fees originated. A substantial portion of the commission expense is deferred through deferral accounting. Advertising expenses increased 12% due to increased market research, new club marketing and direct mail programs used to grow initial membership fees. Member processing and collection center expenses and general and administrative expenses were substantially unchanged quarter over quarter. The provision for doubtful receivables, included in operating costs and expenses, for the third quarter of 1999 was $35.7 million compared to $30.9 million in 1998, an increase of $4.8 million (16%) due to the increase in initial membership fees on financed memberships originated. The total provision rate, inclusive of the provision for doubtful receivables and the provision for cancellations, which is reflected in the financial statements as a direct reduction of initial membership fees on financed memberships originated, was 41% of the gross financed portion of originations during each of the periods. 10 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Deferral accounting was less favorable to earnings by $1.9 million for the 1999 quarter compared to 1998. This decrease reflects the combined impact of a decrease in revenues of $.1 million and $1.8 million decrease in the expense offset. Interest expense was $13.1 million for the third quarter of 1999 compared to $10.2 million in 1998. The $2.9 million increase was due to higher levels of debt incurred. The income tax provisions for the third quarter of 1999 and 1998 reflect state income taxes only. The federal provisions were offset by the utilization of prior years' net operating losses. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Net revenue for the first nine months of 1999 was $638.1 million compared to $556.2 million in 1998, an increase of $81.9 million (15%). Net revenue from comparable fitness centers increased 10%. This significant increase in net revenue resulted from the following: -- Total new membership units sold increased 5% and the weighted average selling price of membership contracts sold increased 6% over the prior year period. These increases were attributable to the sale of higher margin, multi-club membership plans coupled with a significant strategic reduction in the scope of summer discount programs that, historically, resulted in slightly higher unit sales at significantly lower prices and yields. As a result, initial membership fees originated increased $37.2 million (11%). -- Dues collected increased $24.0 million (16%) from the 1998 period, reflecting continued improvements in member retention and pricing from strategies implemented in prior periods and the increase in the number of fitness centers operating under our four upscale brands. -- Finance charges earned during the first nine months of 1999 increased $7.6 million (21%) compared to the 1998 period, due to the growth in size and consistent higher quality of the receivables portfolio. Average interest rates for these finance charges were substantially unchanged between the periods. -- Products and services revenue increased $21.1 million (71%) over the 1998 period, primarily reflecting increased sales of personal training services, nutritional and other retail products and financial services. The weighted average number of fitness centers increased to 338 from 319 in 1998, including an increase to a weighted average of 19 from nine centers operating under our four upscale brands. Operating income for the first nine months of 1999 was $64.6 million compared to $37.4 million in 1998. The increase of $27.2 million (73%) was due to a $81.9 million (15%) increase in revenues partially offset by a $54.7 million (11%) increase in operating costs and expenses. The operating margin before depreciation and amortization increased to 16% from 13% in the prior year period. Excluding the provision for doubtful receivables and the effect of deferral accounting, operating costs and expenses increased $34.0 million (8%) from 1998. Fitness center operating expenses increased $30.0 million (9%) due principally to incremental costs of operating new fitness centers, costs supporting the revenue growth of new product and service offerings and additional commissions from the growth in initial membership fees originated. A substantial portion of the commission expense is deferred through deferral accounting. Advertising expenses increased 6% due to increased market research, new club marketing and direct mail programs used to grow initial membership fees. Member processing and collection center expenses and general and administrative expenses were substantially unchanged period over period. 11 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED The provision for doubtful receivables, included in operating costs and expenses, for the first nine months of 1999 was $107.4 million compared to $92.6 million in 1998, an increase of $14.9 million (16%) due to the increase in initial membership fees on financed memberships originated. The total provision rate, inclusive of the provision for doubtful receivables and the provision for cancellations, which is reflected in the financial statements as a direct reduction of initial membership fees on financed memberships originated, was 41% of the gross financed portion of originations during each of the periods. Deferral accounting reduced earnings by $13.8 million for 1999 compared to 1998. This decrease reflects the combined impact of a decrease in revenues of $8.1 million and $5.7 million decrease in the expense offset. Interest expense was $37.8 million for the first nine months of 1999 compared to $30.7 million in 1998. The $7.1 million increase was due to higher levels of debt incurred. The income tax provisions for the first nine months of 1999 and 1998 reflect state income taxes only. The federal provisions were offset by the utilization of prior years' net operating losses. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for the first nine months of 1999 was a positive $27.2 million compared to a use of $26.2 million in 1998. The period over period improvement of $53.4 million principally reflects the continued growth in overall collections from installment contracts receivable and monthly dues and is net of the timing of other working capital changes which were seasonally low at September 30, 1999. Additionally, inventories of our privately-labeled nutritional line were grown by nearly $3 million to support rapid sales growth in view of the nearly tripling of the number of products offered and to support the rollout of new membership programs that include these products. Net installment contracts receivable grew $58.2 million during the nine-month period. Excluding the growth in receivables, cash provided by operating activities grew to $85.4 million, a $39.8 million improvement over the 1998 period. We have no scheduled principal payments under our $300.0 million subordinated debt until October 2007. In April 1999, the Company amended its $160.0 million securitization facility extending the initial maturity to July 2001. The interest rate on the $145.5 million of fixed rate accounts receivable trust certificates remained unchanged at 8.43%. The interest rate on the $14.5 million of floating rate accounts receivable trust certificates is 3.01% above the London Interbank Offer Rate with the interest capped at 8.99% pursuant to an interest rate cap agreement. The remaining features of the securitization facility remained substantially unchanged. Accordingly, our debt service requirements, including interest, for the next 12 months are approximately $61.7 million. We believe that we will be able to satisfy our annual debt service requirements, capital expenditures and stock repurchases, if any, out of available cash balances, cash flow from operations and borrowings on the revolving credit facility. In November 1999, we completed a $175.0 million senior secured credit facility consisting of a 5-year $75.0 million term loan due November 2004 and the modification of our existing revolving credit facility increasing the amount available to $100.0 million and extending the maturity to November 2002. The amount available under the credit line is reduced by any outstanding letters of credit, which cannot exceed $30.0 million. At September 30, 1999, we had drawn $28.5 million on the line, and outstanding letters of credit totaled $6.1 million. At November 12, 1999, the revolving credit facility was undrawn except for $6.1 million of outstanding letters of credit. We are authorized to repurchase up to 1,500,000 shares of our common stock on the open market from time to time. As of October 31, 1999, we have repurchased 554,800 shares at an average price of $17 per share. No purchases have been made since September 1998. 12 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED During the first nine months of 1999, we invested $82.7 million in property and equipment, including approximately $58.0 million related to new fitness centers and major upgrades and expansions, including new equipment, of existing fitness centers and $7.5 million to purchase existing leaseholds. We opened 13 new facilities during the first nine months of 1999 and acquired 23 fitness centers; 10 in Toronto, Canada, six in Fresno, California, four in the Seattle area, two in the San Francisco area and one in the Chicago area. YEAR 2000 We have completed an assessment of whether our systems and those of third parties which could have a material impact on our business will function properly with respect to dates in 2000 and thereafter. We believe all critical system modifications have been completed and implemented. We believe the only third parties that could have a material impact on our business are the major financial institutions that process our collections of installment receivables and monthly dues by electronic payment methods. We believe these financial institutions are currently working on modifications to their internal systems to insure those systems will function properly with respect to dates in 2000 and thereafter and expect these modifications will be completed in 1999. We do not anticipate that noncompliance, if any, with year 2000 of any of our non-information technology systems, such as embedded microcontrollers, will materially or adversely affect our business. We believe our worst case scenarios result primarily from third party noncompliance, if any, with year 2000. Due to our geographic dispersion, we believe the assessment of these scenarios and the development of contingency plans is not practical or feasible. FORWARD-LOOKING STATEMENTS Forward-looking statements in this Form 10-Q including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include, among others, the following: general economic and business conditions; competition; success of operating initiatives, advertising and promotional efforts; existence of adverse publicity or litigation; acceptance of new product and service offerings; changes in business strategy or plans; quality of management; availability, terms, and development of capital; business abilities and judgment of personnel; changes in, or the failure to comply with, government regulations; regional weather conditions; failure of entities that provide goods and services to us to be year 2000 compliant; and other factors described in this Form 10-Q or in other of our filings with the Securities and Exchange Commission. We are under no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 13 BALLY TOTAL FITNESS HOLDING CORPORATION PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K (a) Exhibits: 27.1 Financial Data Schedule for September 30, 1999 (filed electronically only). 27.2 Restated Financial Data Schedule for September 30, 1998 (filed electronically only). (b) Reports on Form 8-K: Financial Date Items Statements ---- ----- ---------- August 3, 1999 #5 and #7 None 14 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BALLY TOTAL FITNESS HOLDING CORPORATION -------------------------------------------------------------- Registrant /s/ John W. Dwyer --------------------------------------------------------------- John W. Dwyer Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer) Dated: November 15, 1999 15 EX-27.1 2 EXHIBIT 27.1 - 09/30/1999 FORM 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999, THE CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 SEP-30-1999 12,517 0 616,774 136,436 0 280,520 818,694 371,654 1,286,620 448,731 548,676 0 0 243 198,836 1,286,620 0 638,058 0 377,611 30,310 107,410 37,805 28,609 580 28,029 0 0 (262) 27,767 1.19 1.02 THIS AMOUNT IS THE SUM OF THE SHORT-TERM AND LONG-TERM INSTALLMENT CONTRACTS RECEIVABLE LINES ON THE CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND IS NET OF UNEARNED FINANCE CHARGES. THIS AMOUNT IS THE SUM OF THE FITNESS CENTER OPERATIONS LINE, THE ADVERTISING LINE AND THE CHANGE IN DEFERRED MEMBERSHIP ORIGINATION COSTS LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999. THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999.
EX-27.2 3 EXHIBIT 27.2 - 09/30/1999 FORM 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET, THE CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 30,926 0 532,114 116,572 0 264,063 671,428 332,871 1,050,094 392,992 407,116 0 0 236 157,806 1,050,094 0 556,203 0 339,770 30,615 92,555 30,723 8,862 525 8,337 0 0 0 8,337 .38 .32 THIS AMOUNT IS THE SUM OF THE SHORT-TERM AND LONG-TERM INSTALLMENT CONTRACTS RECEIVABLE LINES ON THE CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND IS NET OF UNEARNED FINANCE CHARGES. THIS AMOUNT IS THE SUM OF THE FITNESS CENTER OPERATIONS LINE, THE ADVERTISING LINE AND THE CHANGE IN DEFERRED MEMBERSHIP ORIGINATION COSTS LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998. THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998.
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